Navigating the high interest-rate environment: 5 rules to follow

InvestorKit’s latest whitepaper unveiled five rules that can help property investors still thrive in a high interest-rate environment.

For InvestorKit head of research and founder Arjun Paliwal, current market conditions are challenging for property investors, especially on the back of the several rate hikes since May 2022.

“These rules have been formulated through rigorous data-driven research and offer a comprehensive framework for investors to evaluate prior to making investment decisions, regardless of economic conditions,” he said.

Rule 1: Look at undersupply.

Mr Paliwal said amid high interest rates, demand drivers could be weakened and may require long-term perspective to be effective.

“Therefore, analysing the supply levels offers more certainty than analysing the demand alone — instead of focusing solely on areas driven by speculation or demand, investors gain more confidence by examining signs of undersupply in the market,” he said.

These signs may include an undersupply of properties for sale or for rent, or properties under construction.

“By considering these indicators, investors can make more informed decisions and find greater certainty in uncertain times,” Mr Paliwal said.

Rule 2: Understand personal financial circumstances.

Mr Paliwal said macro trends do not significantly affect individual investors.

“Take, for instance, the occurrence of a ‘national property downturn’ which led to market declines in many areas — around one-third of SA3 areas experienced no decrease in property values due to the fact that local markets operate on their own unique cycles,” he said.

When engaging in uncertain markets, property investors must be able to follow these steps: save 25% of monthly income, maintain a buffer of $25,000 to $50,000 per property before considering the next purchase, and set a minimum rental yields and purchase price limits.

Rule 3: Examine the local economy.

Property investors must focus on specific indicators in relation to the local market that they are investing in, rather than relying so much on macro trends.

The unemployment rate is one factor to consider.

“Contrary to popular belief, regional or smaller cities may not necessarily have higher unemployment rates than major cities,” Mr Paliwal said.

Industrial diversity is also a crucial consideration — greater diversity indicates a more resilient economy.

“While correlations need to be reviewed for regions in the middle, an infrastructure boom across the country, supported by government funding at its highest level in two decades, is providing a significant stimulus to the local economy,” Mr Paliwal said.

Other indicators to consider are spending for capita, gross regional product, and internal migration trends.

Rule 4: Doing something is better than doing nothing.

For some investors, cash in bank serves as buffer amid high interest rates that come with high inflation.

“In heightened inflationary times, inflation means cash in the bank is not your friend. You may say that cash in the bank can be a buffer for your current investment but it is not much more than that,” Mr Paliwal said.

“The 2022 Vangard Index Chart demonstrates that over the past 30 years, Australian investment assets have consistently outperformed cash, even during periods of high interest rates in the 1990s and early 2000s.”

Rule 5: There is always something somewhere growing.

Mr Paliwal said market cycles across the country are different, with submarkets each having their own performance.

“Within each state, the capital city intertwines with its regional areas. This also correlates with trends on the SA3 level, which is why we believe you can find a healthy and robust growing region at any time no matter the economic state,” he said.

-

Photo by kanchanachitkhamma on Canva.